The Office of General Counsel issued the following informal opinion on July 6, 2001 representing the position of the New York State Insurance Department.
Re: Service contract reimbursement insurance and Risk retention groups
Does it remain the Insurance Departments position that a service contract provider may not use an insurance policy issued by a risk retention group for the purposes of satisfying the financial security obligations required by N.Y. Insurance Law § 7903(c)(1) (McKinney 2000), as amended by Chapter 578 of the Laws of 2000)?
It remains the Departments position that a policy issued by a risk retention group will not satisfy the financial security obligations under Section 7903(c).
In prior correspondence with this office, you were advised that the Insurance Department maintained its position that a policy issued by a risk retention group would not satisfy the financial security requirements contained in N.Y. Ins. Law § 7903(c)(1) (McKinney 2000), in regard to service contract providers. You note that following the decision of the U.S. Court of Appeals for the Ninth Circuit in National Warranty Insurance Company, RRG v. Greenfield, 24 F. Supp. 2d 1096 (D. Or. 1998), affd 214 F.3d 1073 (9th Cir. 2000), and the United States Supreme Court subsequent denial of certiorari to Oregons appeal, Oregon has changed its position toward risk retention groups. In light of the above, you inquire whether New York will change its position and permit a risk retention group policy to satisfy the Article 79 financial security requirement.
Article 79 of the N.Y. Ins. Law governs the issuance of service contracts. No person or other entity may issue, sell or offer for sale a service contract in New York unless it first registers with the Superintendent of Insurance as a service contract provider, pursuant to N.Y. Insurance Law § 7907 (McKinney 2000). As a requirement of registration, a service contract provider must assure the faithful performance of the provider's obligations to its contract holders by complying with one of the three methods for demonstrating its financial responsibility as provided in N.Y. Insurance Law § 7903(c) (McKinney 2000), as amended by Chapter 578 of the Laws of 2000). Section 7903(c)(1) contains the insurance policy method for demonstrating financial responsibility. It provides, in pertinent part, as follows:
(c) In order to assure the faithful performance of a provider's obligations to its contract holders, each provider who is contractually obligated to provide service under a service contract shall comply with one of the following three paragraphs of this subsection:
(1) insure the performance of all its obligations under all service contracts pursuant to a service contract reimbursement insurance policy issued by an insurer authorized to issue service contract reimbursement insurance in this state or procured by an excess line licensee pursuant to section two thousand one hundred eighteen of this chapter
The foregoing statute constitutes a financial responsibility statute within the reservation of state authority specified in § 3905(d) of the LRRA, as follows:
§ 3905 Clarification concerning permissible State authority:
(d) State authority to specify acceptable means of demonstrating financial responsibility
Subject to the provisions of section 3902(a)(4) of this title relating to discrimination nothing in this chapter shall be construed to preempt the authority of a State to specify acceptable means of demonstrating financial responsibility as a condition for obtaining a license or permit to undertake specified activities. Such means may include or exclude insurance coverage obtained from an admitted insurance company, an excess lines company, a risk retention group, or any other source regardless of whether coverage is obtained directly from an insurance company or through a broker, agent, purchasing group, or any other person. [Emphasis added]
N.Y. Ins. Law § 5913 (McKinney 2000) provides that, when a New York law requires a demonstration of financial responsibility as a condition for obtaining a license or permit to undertake specified activities, if any such requirement may not be satisfied by insurance obtained from an insurer not authorized to do business in New York State, such requirement may not be satisfied by insurance issued by a risk retention group not chartered in this State.
Accordingly, the Department concluded that the New York service contract financial responsibility statute is excepted from federal preemption under the above-cited provisions of the LLRA and that a service contract provider may not use service contract reimbursement insurance issued by a risk retention group.
While the National Warranty case concluded that Oregons financial security law was preempted, and Oregon had to abide by that decision, two other circuits have concluded differently and upheld the state financial security laws that did not recognize risk retention group policies. See Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062 (7th Cir. 1998). Mears Trans. Group v. State of Fla. 34 F.3d 1013 (11th Cir. 1994). Accordingly, the Departments position remains unchanged.
Except as specifically provided for policies placed pursuant to the excess line laws, in New York, a service contract provider may not use service contract reimbursement insurance issued by an unauthorized insurer (e.g., a risk retention group) to demonstrate the providers financial responsibility under Article 79 of the Insurance Law.
For further information you may contact Paul Zuckerman, Principal Attorney at the New York City Office.